The raft of earnings updates today doesn't bode well for the confession season with no less than four notable listed companies issuing downbeat outlooks.
Grocery and auto parts distributor Metcash Limited (ASX: MTS) delivered a shock profit warning, while the market didn't like what Ainsworth Game Technology Limited (ASX: AGI) had to say in its trading update reviewed here.
Both stocks are among the worst performers on our market this morning but gas infrastructure company APA Group (ASX: APA) and logistics group Qube Holdings Ltd (ASX: QUB) aren't far behind with APA shedding 1.9% to $8.90 and Qube tumbling 4.8% to $2.64 during lunch time trade.
The confession season is when companies come clean about their performance as the financial year draws to a close.
APA tried to sneak in its earnings update by putting it at the bottom of its pipeline acquisition announcement, which wasn't marked "market sensitive".
That's pretty poor given that management is essentially issuing an earnings downgrade as it now expects normalised earnings before interest, tax, depreciation and amortisation (EBITDA) to range between $810 million and $825 million compared to its March guidance of $816 million to $873 million.
But this isn't the only reason why I would avoid APA. The stock is a stapled security, meaning its structure is complicated and its debt not easy to work out.
While APA has around $4 billion of borrowings on its balance sheet, the stapled entity has tapped around $8.8 billion in committed debt facilities at March 16, 2015.
The stock's 26% rise over the past year also means its yield has now shrunk to around 4%. I think investors can do better especially given that analysts polled on Reuters are expecting a slight drop in earnings per share for 2015-16.
Meanwhile, Qube is warning investors not to expect any profit growth for 2015-16 even as it predicts higher earnings for the current financial year despite challenging market conditions.
I wonder if Qube is being overly conservative. Forecasting earnings for 2014-15 is hard enough but it is somewhat usual to give a 2015-16 outlook at the current juncture. After all, the confession season relates to the current financial year and outlooks beyond this are typically issued at the full year results in August.
The big drop in Qube's share price is understandable as the stock trades on a premium because investors are convinced management can deliver good earnings growth over the medium to longer term.
The stock is still trading on a 2014-15 consensus price-earnings of 24x even after the sell-off.
Analysts are expecting around an 18% increase in earnings per share (EPS) for the current financial year and 14% growth for 2015-16.
No doubt many will be paring their forecast for the next financial year on the back of the update but I am still expecting high-single digit EPS growth at least.
From that perspective, I would treat any pullback in the stock as a buying opportunity.
